Small self-administered schemes (SSASs) have been around in one shape or form since as long ago as 1973. That was the year in which company directors were first permitted to make pension provisions for themselves.
However, it took until 1979 before a codified framework for SSASs was laid down by the then Inland Revenue – and that became a market entry point for some providers.
Despite regulatory changes that may have appeared to weaken the attractiveness of SSASs in subsequent years, the fact remains they continue to prove popular and attractive, particularly to owners/operators of small and medium sized enterprises.
Clients and advisers have various reasons for choosing a SSAS over its close cousin, the self invested personal pension (Sipp).
Investment options
One of the historic key drivers for a SSAS has been the ability to lend funds to a sponsoring employer. This is an option that does not exist with a Sipp. So if the client’s circumstances dictate such a loan is required, a SSAS would have to be recommended over a Sipp. This is assuming, of course, HM Revenue & Custom’s strict loan criteria can be fully met.
In particular, a challenging aspect might be the need for the loan to be secured by a first legal charge over a suitable asset or assets. This requirement arises from one of the aforementioned regulatory changes that may have weakened the attractiveness of SSAS for some clients.
Flexibility
Arguably, a SSAS can provide some flexibility that a Sipp might not. Take, for example, the need to find liquidity within the scheme with which to pay retirement and/or death benefits. As a SSAS is often structured as a common trust fund, where assets are pooled across the membership, it can be easier and quicker to create liquidity.
If, say, a member of the SSAS is entitled to a notional share of commercial property bricks and mortar (which is generally considered illiquid), this bricks and mortar can be notionally exchanged for an equal amount of more liquid assets (such as cash on deposit), thereby making cash available for the payment of benefits.
This is a particularly useful tool in relation to intergenerational planning in a SSAS where, say, parents are members of the scheme along with children who also work in the business.
Control
Another regulatory change affecting SSASs came in the form of the removal of the need to have a professional (“pensioneer”) trustee attached to the scheme.
Theoretically, this gives clients the ability to dispense with the services of a poorly performing professional trustee while enabling the SSAS to continue to operate. Contrast this with the situation in a Sipp. In order to dispense with the services of a Sipp provider, it is necessary to engage in a pension switch to another provider, and to have the legal ownership of the Sipp’s assets changed accordingly.
In practice, the majority of SSAS clients (and their advisers) are likely to want to retain the services of a professional trustee, and therefore simply choose to replace one poorly performing one with a more efficient one through a so-called “SSAS takeover”.
Cost
There may be a perception within the financial services industry that SSASs are always more complex and more expensive than Sipps. That need not be the case, and much depends on how efficiently a professional trustee administers the scheme (and all of the other schemes to which it is exposed).
Depending on the professional trustee’s charging structure, clients can benefit from economies of scale by having a SSAS. Take, for example, four company directors wishing to buy commercial property through a pension scheme. That could be accommodated across four Sipps, which jointly buy the property (assuming the provider allows joint purchases), or it could be accommodated through one SSAS for those four directors.
Not only might there be savings in administration fees by having one SSAS rather than four Sipps but there may also be additional savings if, say, pension scheme borrowing is required for the acquisition; one arrangement fee from the lender for SSAS borrowing, rather than four such fees for four Sipps.
There is no doubting SSASs continue to play an important part in the retirement planning landscape for certain clients and, given their special attributes, they cannot afford to be ignored as a potential solution to meet client needs.
Stephen McPhillips is technical sales director at Dentons Pension Management
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